How to trade gold?
Learn how to diversify you trading by adding the precious metal in your portfolio
Gold trading – The basics
Investing in metals is not a new concept. Precious metals are difficult to mine, which makes them rare and expensive. This is how they derive their value and this is precisely why they are so commonly termed as “precious”.
Out of all precious metals, gold is the most popular choice for traders. The gold market offers exceptional opportunities to online traders. This is mainly because gold, unlike other investment options, enjoys a unique position in the world economy.
Who trades gold
The gold market attracts a large variety of people. Most of them are looking for safe and lucrative options to invest their money for sustained growth in wealth or for protection from riskier investments. That’s exactly what makes gold so appealing. The participants of the gold market can be efficiently divided into the following categories:
These are mainly private investors and gold dealers. Gold bugs form a large part of the overall gold market. These people are fundamentally bullish on the precious commodity and allocate a large amount of their assets in gold. They make up a large number of the retail participants in the market. These long-term players are the ones that add significant liquidity to the market with their continuous buying interest.
These institutions may include hedge funds, banks and broker firms involved in the buying and selling of gold. Most of these institutions employ calculated strategies to formulate diversified trading combinations that provide a safety net for their clients in highly volatile market conditions. Most of these institutions do not strictly deal in gold. They usually have other options in their portfolios as well.
Why trade gold?
Everyone has their own preference when it comes to making trading choices. When it comes to gold the most common reasons why traders get involved in this market are explained below:
As we mentioned before, seasoned investors just like institutions, tend to diversify their investment portfolios in an attempt to mitigate risk and improve profitability of their investments. Trading in gold is considered an excellent way to add protection to trading portfolios, because gold prices tend to negatively correlate with stock markets.
Hedge against inflation
While currencies lose value over time due to rising inflation, gold is inflation-proof. Even during the crunch time of recession that struck global markets back in 2008, gold prices were barely affected. In fact, between 2007 and 2008, the gold prices increased by almost 4%.
Store of value
About 95% of gold in the world is held as jewellery or in bullion vaults. The fact that the supply of gold is increasing at a meagre rate on a yearly basis as compared to the amount of gold hoarded, it is no wonder that its price has been increasingly on the rise in the past five decades.
What affects gold prices
There is a number of factors and market participants that affect the prices of gold. Here’s a quick overview:
Central banks - These institutions buy and sell gold to regulate their reserves in an attempt to stabilize the value of their currency. This consequently pushes gold prices accordingly.
Crude oil - Crude oil and gold are strongly linked due to their dollar value. Also, a rise in the price of crude oil increases inflation which could in turn reflect on the price of gold.
Dollar value - Since gold is quoted in US Dollars, an increase in the value of dollar automatically adds negative pressure on the gold prices.
Stock markets - A stock market decline is often the time when traders turn to gold and its price pushes higher.
Historical gold prices
Below is a chart showing the fluctuations of the gold price in the past five decades. All in all, there has been a drastic increase in the price of gold since 1970. During this entire period, the least return on investment to investors who had tied their money to gold was between 1970 – 1979. The biggest rise, on the other hand, was experienced between 2000 – 2009.
Gold price volatility 1970 - 2017
Example of gold trading
Let’s see how trading gold works in practice. You do your research and you think that the price of gold will appreciate. For that reason, you buy 1 lot (100 oz) of XAU/USD at the price of 1,184.60. One lot equals $100 for every $1 movement in the price of gold.
The interest in gold spikes up and a couple of days later the price trades at $1,189.70. You decide to sell and lock your winnings. Your profit is calculated as follows: (1,189.70 – 1,184.60) x $100 = $510.
The price of gold does not move your way and the day after the price trades at $1,180.30 . You decide to close the position and cut your losses. The loss in this case is: (1,184.60 - 1,180.30) x $100 = $430
Although gold is the most popularly traded precious metal, traders who see the value in diversifying their trading with gold, they often explore other metal markets too, such a silver.
Losses can exceed deposits.